Retirement Life
4 October 2022
Living it up in retirement
One of the biggest mistakes people make in retirement is they don’t spend enough. That’s understandable. People who are good savers during their working life find it hard to break the saving habit. My own dad was still saving for his retirement at the age of 96! When you have worked hard and gone without to build up a retirement nest egg, it’s not easy to watch it all disappear again.
Retirement is full of uncertainties, and those who err on the side of caution like to spend in moderation in case things don’t go according to plan. Perhaps you might live longer than expected. You might have unplanned health expenses. Then there is the risk of low investment returns or even losses. Of course, there is also the worry that once your retirement capital is spent, it is hard to replace unless there is the prospect of an inheritance or a lottery win. For all these reasons, people often leave behind more money than they intended for the beneficiaries of their estate.
Reaching the end of life without having either overspent or underspent money is a matter of both luck and careful planning. It’s a matter of finding what I call the ‘Goldilocks’ rate of spending – not too high, not too low, but just right.
I spoke with Ralph about the 'Goldilocks' rate in a webinar earlier this year. If you haven't seen the Webinar, view it below.
Most people aim to make the early retirement years the best years of their life. The early years are when health and energy levels are at their peak. But is it wise to live it up in those early years and run the risk of running out of money later on?
Here’s how to approach planning your retirement to get the maximum enjoyment while minimising your financial risk.
Project your fortnightly, tax-paid income.
Start by estimating your remaining life span. Err on the side of caution by assuming you are going to live a long time. Once you reach the age of 65, you can reasonably expect to live to close to 90. However, you might want to lengthen or shorten that timespan depending on your personal circumstances of health and genetics.
How long you are going to live, also known as longevity risk, is fundamental in Lifetime's retirement income solutions.
Lifetime offer three types of Life Expectancies:
- Shorter Life Expectancy – Higher income, designed for those who aren’t expecting to live into their 90s
- Average Life Expectancy – Moderate income, designed for those who expect to live part way through their 90s.
- Longer Life Expectancy – Lower income, designed for those who are expecting to live into their late 90s.
Head to the Lifetime Income Projection to Calculate your income.
Once you have decided how long you want your money to last, it is then important to deal with your day to day expenses. Doing a budget and understanding how much you require each fortnight for the bills and having an retirement income strategy, like found with Lifetime, is an important step.
Once you have dealt with your Income, it is time to deal with your lifestyle spending, such as trips, cars and doing up the house.
To do this, divide this time into blocks. The first block to consider is the period when you want to live it up while your health and energy are still good. Maybe you want to cram all your live-it-up activities into the first five years when there is more certainty around health and energy. On the other hand, if you are confident about your health future, you might want to live it up for ten years.
Now consider the period of time after your live-it-up stage. If it’s more than ten years, break it into two time periods.
Next, allocate your available investment money (after removing your allocation for retirement income) to each of the blocks of time. Start with the block of time closest to the end of your life span. In this stage, your outgoings are likely to be focused on health needs and living arrangements – that is, living in a retirement village, rest home, or your own home with perhaps some paid assistance. This stage is more about living comfortably and maintaining health rather than living it up. Think about how much of your retirement nest egg you might want to allocate to this period of time.
Now work backwards in time. If you have three blocks of time, what might you be doing in the middle block? Perhaps some local travel? This is a period when social activities are usually significant. You may choose to belong to various groups based on hobbies, sports, and interests. You might have some health needs in this time frame, and you might also need to spend money on home maintenance and replacing your car. How much of your retirement nest egg would you want to allocate to this period?
Whatever is left after allocating money to these two blocks of time is what you can allocate to living it up in the early years. You might want to review your allocations until you feel comfortable with the balance between each one.
There are some fundamental principles to keep in mind.
- Your living costs tend to fall over time as you slow down and your needs become less. This is why Lifetime offer an option that allows you to spend more earlier in retirement.
- You can factor in a ‘just in case’ amount of money to keep aside in case you live longer than expected or in case you have a large, unexpected expense.
- The funds you set aside for later in life should be invested in a portfolio that is exposed to growth investments such as shares, so as to keep up with inflation.
- You can consider tapping into the equity in your home as a backstop or in case you require more funds than you have available.
- You can adjust your spending as you progress through retirement by repeating this exercise every one or two years. If you use Lifetime Income to deal with your retirement income, they will review your income every year, so if you are a Lifetime customer this is a great to to review all of your outgoings and assess if anything major has changed in your circumstances.
If you plan carefully in this way to minimise the risk of running out of money, you should be able to live it up in the early years of retirement without worry or guilt.
How much should you invest to top your income up?
Written by:
Liz Koh
Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.
Invest with Lifetime for a retirement income managed for living.